Does vesting continue while I am on a leave of absence, sabbatical, or furlough?
This depends on the terms of your company's plan document and your grant agreement, as well as the reason for an approved leave of absence (LOA). Some plans give you vesting credit for an authorized unpaid LOA, such as a sabbatical or a maternity leave, while others do not. Some plans continue vesting for paid leaves or "statutory" leaves (i.e. those required by law) but not for disability leaves.
Alert: Special rules apply to incentive stock options (ISOs). A leave of absence that continues for longer than a certain period can cause ISOs to be converted into nonqualified stock options (see a related FAQ).
Survey Suggests Most Companies Do Not Modify Vesting Schedules
In a 2019 survey, the National Association of Stock Plan Professionals (NASPP) found that the vast majority of companies do not modify the vesting schedule of options or restricted stock/RSUs for any type of approved leave of absence. In a blog commentary on this topic (7 Things To Know About Leaves Of Absence And Equity Awards), the NASPP states that "overwhelmingly, companies do not adjust vesting for leaves." Among those which do adjust the vesting schedule, some companies toll the vesting from the start of the leave, and others do so from a specified date after the leave has begun (e.g. three months into it).
Furloughs For The Covid-19 Pandemic Raise Questions
The Covid-19 pandemic has necessitated a furlough for many employees and brought the related issues for stock plans to prominence. It may not be clear under your stock plan whether a Covid-19 furlough is considered a leave of absence or a termination, creating confusion about the impact on continued vesting and, for stock options, the post-termination exercise period. The general guidance we are hearing from lawyers is that when the furlough is for a specified length of time it can fit into the LOA provision in the plan, but when it is for an indefinite period it's a termination.
For companies that allow vesting to continue in a statutory leave of absence (e.g. maternity leave, disability leave) that is protected under local law, furloughs because of the pandemic could come under consideration as a type of protected leave (see a commentary from the law firm Orrick). You want to ask your company for its specific interpretation on each of your outstanding stock grants. For more on furlough issues relating to compensation and benefit plans, see commentaries from Epstein Becker Green, Ogletree Deakins, and McDermott Will & Emery.
What Happens If Vesting Is Discontinued?
If your plan allows you to keep your grant but does not continue your vesting during this period, the vesting date moves forward.
Example: You have confirmed that your leave of absence is not a termination of employment. Your options or shares of restricted stock are scheduled to vest 12 months after the grant date of January 1. During the summer after the grant date, you take a three-month approved unpaid leave of absence, which suspends or tolls your vesting. Your vesting date moves forward from the next January 1 to the next April 1.
Companies may also prohibit stock option exercises during the leave. For restricted stock units, should your company allow vesting to continue but delay release of the shares to you until your return, issues may arise related to IRC Section 409A.
Many plans are silent on adjustments for leaves of absence. In this situation, you should ask your HR director, CFO, or stock-plan administrator. Before you do, check your company's employee handbook for any written benefits policy on this point.
Alert: Know when your leave of absence officially ends. Your employment will terminate at that time unless you go back to work under the terms of your approved leave or as permitted by law.